If you are under the age of 30, you might have never even heard the term “buy and hold”. It used to be that a sound investment strategy was to pick some good blue chip stocks, buy them, and then hold for 10 or 20 years. At the end of that time period you were almost guaranteed of making money and usually it was a higher return than you could have gotten with just plain interest income.
However, somewhere around the time the Internet started to become a factor in investing, things become much more volatile and unpredictable. You can see the chart below that shows a very steady increase in the Dow from 1981 all the way up to about 2000. Then things start to get a lot more choppy and the ups and downs are much bigger.
Buying and holding stocks in those early years on the graph was a winning play. You could confidently buy most any solid company, forget about it for 10 or 15 years, and come back to see how much you made. But from the 2000’s onward, things seem to have changed and I attribute much of that to the Internet.
Online trading is now the way most people buy and sell stocks. It is quick, easy, and cheap which at one point led to the proliferation of day traders. Guys (and gals) trading in and out of stocks every day made for a lot of volatility and you can see a big difference in the chart from 2000 to the present. Day traders weren’t investors and they weren’t interested in picking good stocks that had value. They just wanted to find the best stocks to buy right now, get a quick up tick, and then they were happy with their small gain and sold. You can see how much things have fluctuated since 2000 in the graph below:
The Internet has also made information on companies and the business news of the day accessible to everyone almost instantly. This has helped to somewhat even the playing field between the professionals and the everyday average investors. Things happen fast now and when news breaks, everyone knows about it and reacts. This is a big departure from the way news traveled in the 1980’s.
Technology now is progressing at a quicker pace than it used to. There are new industries popping up all the time (like sun power, wind power, recycling, and others) that take the place or add onto the way we do things. New companies are formed and old ones have to adapt to survive. This makes buying and holding stocks for long periods of time no longer a profitable way of investing. Now, when you buy a stock, you need to keep a close eye on it more than ever before.
There are many sources of information including the “Stock Market For Dummies” types of books that are geared toward beginning investors. Online and offline, you can now find more stock market material than ever before. People who might have never before gotten interested in stocks are now pulled in because of the ease of it all. This all contributes to more investors who are unsure of what they are doing and more likely to panic and sell when things look bad or buy too high when the market is flourishing.
The stock market is indeed more of a crap shoot than it was 20 years ago. It doesn’t mean you can’t make money in it: it just means you have to keep tabs on all your investment choices and watch them carefully all the time. Long gone are the days when you could buy a stock and sit back and hold it for a long period of time.